Assembly committee cracks down on corporate tax-avoidance structure

Posted on October 02, 2014

An Assembly committee approved a Democrat-backed bill Thursday that would prevent the state or an independent authority from contracting a company that is structured to avoid paying taxes by having their corporate headquarters overseas.

The Commerce and Economic Development Committee voted 7-3, splitting along party lines, to pass the bill out of committee.

The bill echoes efforts by President Obama to make it more difficult for companies to use the "inverted domestic corporation" to reduce their taxes, in part by restricting the scenarios in which the tactic can be used.

The term generally refers to a company formerly incorporated in the U.S. that incorporates in a foreign country, or one that becomes a subsidiary of a corporation that is incorporated abroad.

A press release from Assembly Democrats after the vote said the bill would "help entice companies to stay in the United States" and would stop them "fleeing overseas with taxpayer dollars."

"If a corporation doesn't want to pay its fair share of taxes, it shouldn't be benefiting by receiving taxpayer-funded dollars," said Assemblyman Troy Singleton, D-Burlington, a bill sponsor. "Hopefully, this will create more of an incentive for them to stay in this country and continue employing U.S. workers."

Under the bill the state treasurer would be responsible for determining whether a corporation seeking a contract or subcontract is an inverted domestic corporation. The bill also states that if the federal government has barred a company from performing federal contracts because it is an inverted domestic corporation, then New Jersey will also consider it one.

"Punitive measures won't prevent a company from leaving the United States," said Assemblyman Gary Schaer, D-Passaic, who also sponsored the bill, as did Assemblyman Joseph Lagana, D-Paramus.

"Rewarding domestic corporations with the opportunity to compete for taxpayer funded contracts is a far better incentive to help keep them operating in this country," Schaer said.

Obama in July referred to companies that use cross-border mergers to reduce their taxes as "corporate deserters," and questioned their patriotism. In September, he introduced new executive branch rules making such mergers less profitable, but the administration said legislation by Congress would be required to more effectively crack down on the tax avoidance schemes.

Republicans in Washington say they won't consider such legislation unless it is part of a broader revamp of the individual and corporate tax codes.

The new federal rules prevent a company from using the tax avoidance scheme if the former owners of the U.S. company own 80 percent or more of the new, foreign-incorporated company. The rules also close a loophole that allowed an "inverted" company to tap the earnings of a foreign subsidiary without paying U.S. taxes.